Top Tabs

Monday, August 2, 2010

Distribution Potential

About eight months ago, Imation (IMN) was discussed on this site as a potential stock idea. It traded for $300 million and had $80 million worth of cash (with no debt). Today, Imation trades a little higher at $360 million, but now has $250 million worth of cash. The company has been breaking even on an earnings basis, but is getting positive cash flow from cutting its inventory/receivables and from cash earnings (since cash is not affected by Goodwill write-downs and amortization).

Many companies need to carry large cash balances (e.g. for capital outlays), but Imation is not one of those companies. Depreciation expenses have been almost twice as much as capital expenditures over the last several years, and the company settled a lawsuit a couple of quarters ago that reduced its cash obligations significantly. As such much of that money, which represents about 70% of the company's market cap, could be returned to shareholders without harming the business. But will that money be distributed?

Imation traditionally does return cash to shareholders, having distributed almost $200 million to shareholders over the last four years in the form of dividends and share buybacks. Therefore, history is on the side of the shareholder. (In 2009, however, it scrapped its dividend and didn't buy any shares in order to avoid a liquidity crisis. While that undoubtedly hurt the share price then, it has left the company with more cash to distribute now!)

Management comments have also suggested shareholders may see some of that cash, as the following statement from its CEO on last week's conference call indicates:

"We've recognized that the cash on our balance sheet is not getting the return our shareholders want. And we've looked at other strategies, including bulk share repurchase and dividends. That's not promising what we're going to do or when we're going to do it, except that we understand, we get the math, we understand that you don't want a lot of cash just sitting on the balance sheet and not deployed."

We've seen before the kind of price run-up that can occur when management returns cash to shareholders. Not only does the stock price often benefit because of the immediate cash distribution, but it also begins to trade up on the idea that management is shareholder-friendly and will therefore operate in a shareholder-friendly way in the future as well. On the other hand, nothing is guaranteed here, as Imation is also free to pursue acquisitions with the bulk of its cash as well. But at the current share price, hopefully shareholders will benefit no matter how that cash is deployed.